Update COVID-19 in Indonesia: 266,845 confirmed infections, 10,218 deaths (25 September 2020)
25 September 2020 (closed)
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The decision of Indonesia's central bank (Bank Indonesia), last week, to cut its key interest rate (BI rate) by 0.25 percent to 7.00 percent and to cut the reserve-requirement ratio for commercial banks' rupiah deposits by 1 percent to 6.5 percent is a decision that should boost household consumption in Indonesia in 2016, improve people's purchasing power, give rise to a stronger automotive and property sector, and boost liquidity at local banks (hence providing room for an acceleration of credit growth in Southeast Asia's largest economy).
However, a lower BI rate will not have an immediate and direct impact on rising household consumption in Indonesia. Key to an increase in household consumption is higher household (disposable) income. For most households a significant portion of income is spent on fuel, either directly (at the fuel dispenser) or indirectly (higher oil prices will translate into higher logistics costs for the transportation of products or services that consumers buy). As such, lower fuel prices in Indonesia would have a much more direct and immediate impact on household consumption. There should be room for lower fuel prices in Indonesia as the world's benchmarks - Brent crude and West Texas Intermediate - have fallen (and stayed) below the USD $37 per barrel level since the start of 2016 and could remain here in the foreseeable future.
However, fuel prices (premium gasoline and diesel) in Indonesia do not immediately fall or rise in accordance to the global crude prices. In January 2015 the Indonesian government scrapped subsidies for gasoline fuel (premium) and introduced a fixed IDR 1,000 per liter subsidy for diesel. Part of this policy reform was that prices would be set each month and would float in line with the trend of global oil prices. Later, however, the government revised this policy and announced it will determine fuel prices per quarter (but they would still float in accordance with global oil prices). The fuel prices would be determined based on the average of global crude over the past three months.
The last time the Indonesian government revised fuel prices was in January 2016. Premium gasoline was set at IDR 7,050 per liter, while the diesel price was set at IDR 5,650 per liter. However, these prices were based on global crude in the October-December 2015 quarter. As global crude continued to fall in January and February, Indonesians are thus paying too much for fuel. The next fuel price review will be conducted in March 2016. Given global oil prices have fallen by more than USD $10 dollar per barrel in the last quarter of 2015, we expect to see fuel price cuts in March. This would have a positive effect on household consumption.
However, fuel price cuts remain risky in Indonesia as prices of products and services are usually stubborn to fall when the government cuts fuel prices, while prices tend to rise quickly in case the government raises fuel prices.
The table below shows that household consumption growth in Indonesia started to slow since the second half of 2011 amid the slowing pace of Indonesia's economic expansion (higher subsidized fuel prices in 2013 and 2014 caused high inflationary pressures).
Indonesia's Quarterly Household Consumption Growth (annual % change):
|| Quarter I
||Quarter II||Quarter III||Quarter IV|
Source: Statistics Indonesia (BPS)
Juda Agung, Executive Director at the Economic and Monetary Policy Department of Bank Indonesia, said the lower BI rate will make it easier for households to purchase cars and property due to lower borrowing costs. Therefore, he expects Indonesia's household consumption to accelerate to a growth pace of 5.0 percent (y/y) in the first quarter of 2016.
In case inflation and the rupiah exchange rate remain stable (amid global uncertainty caused by China's economic slowdown and possibly further monetary tightening in the USA) then Bank Indonesia may cut is key interest rate again this year. We believe there is room to cut the BI rate to 6.5 percent later this year.